Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: SUNDAY, September 25, 1994 TAG: 9409260038
SECTION: VIRGINIA PAGE: D-1 EDITION: METRO
SOURCE: BRIAN KELLEY STAFF WRITER
DATELINE: BLACKSBURG LENGTH: Long
Pundits like to talk about "political capital," as in how much a certain stand will cost a politician, or how much will be gained.
At Virginia Tech, about 100 economics students are learning - and could be earning - with political capitalism.
The students, along with counterparts at other major Virginia universities, are trading in the Iowa Electronic Market, a working - though penny-ante - futures exchange based on the Virginia Senate race.
"This is a hands-on example of how a free market works," said Sheryl Ball, a Tech assistant professor who requires her 60 managerial economics students to invest in and follow the market. She put in $50 of her own money, too.
In the Virginia race, investors trade electronically in two markets via the Internet: the winner-takes-all field, which tries to predict who will win; and the vote-share market. In the second, the final value of a share is determined by a candidate's percentage of the vote. So if a trader buys shares in a candidate at 45 cents each and he wins only 40 percent in November, then the trader loses 5 cents per share.
Eighty-five percent of the 2,951 people with access to the Senate market are academically affiliated, but it's open to anyone with Internet access and becomes more interesting - and accurate - with more shareholders. There are 300 to 400 active traders on the Virginia market, and the total amount invested was $38,394 as of midweek, according to Robert Forsythe, a University of Iowa business school professor and market founder.
Ed Zerkle, a 22-year-old graduate student in Tech's Pamplin College of Business, invested shrewdly his first day.
Sensing that Sen. Charles Robb's stock was undervalued, Zerkle bought Robb low in the winner-take-all market. Then independent candidate Douglas Wilder bailed out, sending Robb soaring. The result: The value of Zerkle's $25 investment increased $10. It will pay off, though, only if Robb wins.
Zerkle said his next move may be to go with Republican Oliver North. "I'm thinking about trying to buy some of him, just to see what happens," he said. "I'm feeling lucky."
The market's organizers claim the application of capitalism to politics has been more accurate, in most cases, than traditional polling in anticipating final vote shares. For nine of the first 12 races, the market outperformed polls. That's because, in theory at least, the profit motive means investors will buy and sell shares of independent Marshall Coleman, Robb and North with money rather than ideology in mind.
In the Virginia race, the market has shown as tight a race if not tighter than that depicted in three recent polls. On Sept. 14, when one poll showed North leading by 3 points and another showed Robb leading by 5, the market held both even at 40 cents per share. On Wednesday, when another poll showed North leading by 6 points, the market again showed them dead even. Accounting for margins of error, the polling results, too, depict a neck-and-neck race.
Also key is the information investors use to make their trades.
Tech graduate student Chris Judson, 26, moved to Blacksburg from the Detroit area this summer. "This Senate campaign, even the papers out there were following," Judson said. But now he gets his news from the Wall Street Journal and Newsweek, and therefore doesn't see in-depth Virginia coverage.
Still, a good investment can come from instincts. At first, Judson spread his account between Robb and North. Then North's stock in the vote-share market went up 10 to 12 cents per share above Judson's purchase price. He sold all his North high and bought Robb low, just before Wilder's announcement. Like Zerkle, he reaped a reward.
Nationally, there are 11 other markets under way this fall, such as predictors of how many seats each party will control in Congress, and statewide contests in New Jersey, Texas and New York. Contracts on elections in Germany and Sweden also are being traded, though in deutsche marks and krona, rather than dollars.
The Iowa Electronic Market is overseen but not regulated by the federal Commodity Futures Trading Commission, Forsythe said. To avoid regulation, the market must remain nonprofit, limit its advertising and keep the investments below $500, among other steps.
Though the money makes it interesting - a graduate student turned $35 into $800 during the 1992 presidential race - it really isn't the point. Investors buy contracts on North, Robb or Coleman after investing as little as $5 or as much as $500. At Tech, all accounts are for less than $50. Wilder still is listed on the exchange, but the former governor's stock became about as valuable as Monopoly money in a Scrabble game after his Sept. 15 withdrawal.
Electronic markets have been conducted on 13 races in eight countries since 1988. But the market truly works only if there are many investors following it and trading shares. In mid-August, for instance, the market showed North's stock flat and Robb far ahead, though a string of newspaper stories at the time clearly indicated North's momentum was surging while Robb was stuck in Washington, D.C., attending to congressional business.
But that same period was just before most students came back to school, and trading volume was extremely low. Since then, the two most dramatic shifts in both markets have come after the Sept. 6 debate at Hampden-Sydney College and after Wilder's withdrawal.
At Tech, many of Ball's students who are playing the market are in the master of business administration program. Most of the economics department's doctoral candidates also are playing, as are students at the University of Virginia, Virginia Commonwealth University and George Mason University. Professors at UVa and VCU helped get the Senate race into the Iowa Electronic Market, beginning in late January.
Later this semester, Ball will use the political futures exchange to illustrate concepts that influence real-world markets. With the Iowa market, Ball said she will be able to talk about the ups and downs of the political races in relation to market reactions, rather than using "widgets" or some other fictional product.
David Miller, 24, a senior from Alexandria, is investing in all three candidates. "I'm hedging most of my money, so I can take advantage of any chance of arbitrage," Miller explained. Arbitrage is a method of buying and selling a security or commodity to take advantage of fluctuations in the market; hedging is a way a buyer spreads his investments to cushion himself against falling prices.
Joked Miller: "It's going on my resume, how many percentage points I can increase it."
by CNB